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A Narrow Reading of, and Refusal to Extend, Granfinanciera and Stern – Bankruptcy Courts May Enter Final Judgments in Fraudulent Transfer Actions against Defendants Who Have Not Filed Proofs of Claim

Paragon Litigation Trust v. Noble Corp. plc, et al. (In re Paragon Offshore plc, et al.), No. 17-51882 (CSS), 2019 WL 1112298 (Bank. D. Del. Mar. 11, 2019)

Following Stern, bankruptcy courts have been tasked with determining which claims may not be adjudicated to final judgment without running afoul of Article III of the United States Constitution.  These so-called “Stern claims” are statutorily core matters on which the bankruptcy court may not constitutionally enter final orders.  As recognized by Chief Judge Sontchi, this “is no simple task.”  Op. at 4.  In this Opinion, the Court was faced with whether entering a final order on core fraudulent transfer claims brought against a party that did not file a proof of claim in the underlying bankruptcy case would violate Article III.  After examining the scope and application of Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), and Stern v. Marshall, 564 U.S. 462 (2011), which do not provide a clear approach to the constitutionality of non-Article III adjudication, Chief Judge Sontchi believed the “best answer that this Court can provide to that question is ‘no.’”  Op. at 6.

Here, debtor Paragon Offshore plc (“Paragon”, and together with certain of its affiliates, the “Debtors”) and Noble Corporation plc (“Noble”) entered into a settlement agreement, which was included as part of the Debtors’ second proposed plan.  However, confirmation of the second proposed plan was denied, and the version of the plan that was ultimately confirmed did not incorporate the settlement with Noble.  Following confirmation, the Paragon Litigation Trust filed a complaint against Noble and other defendants (collectively, the “Movants”) alleging, among other things, fraudulent transfer and unjust enrichment.

The Court easily resolved the parties’ disagreement regarding whether the unjust enrichment claim was core or non-core.  Even though the unjust enrichment claim was based on the same factual predicate and sought the same remedy as the fraudulent transfer claims, because state law unjust enrichment actions are distinct and arise outside of the bankruptcy context, the Court found it to be non-core.

Before turning to the Article III issue, the Court considered whether the Movants consented to entry of a final order by the bankruptcy court.  Neither Noble’s entry into the settlement agreement with Paragon nor its failure to object to certain jurisdictional provisions in the confirmed plan constituted implied consent.  Indeed, “failure to object to a plan provision providing for [the bankruptcy court’s] continued jurisdiction does not constitute waiver of a party’s right to have claims heard by an Article III tribunal.”  Op. at 14. Absent consent, the Court looked to Granfinanciera and Stern to determine if it could enter a final judgment on the core fraudulent conveyance claims brought against Noble, a non-claimant defendant.  While the facts in Granfinanciera are similar, the issue before the Supreme Court was whether a non-claimant defendant was entitled to a Seventh Amendment right of trial by jury in a core fraudulent transfer action.  However, the Supreme Court refused to weigh in on the constitutionality of final orders entered by bankruptcy courts pursuant to 28 U.S.C. §§ 157 and 158.  Noting that Stern “perhaps mischaracterizes” the Granfinanciera opinion, and suggesting that the extension of Granfinanciera to the Article III context is incorrect, the Court read Stern narrowly.  Op. at 22.  Accordingly, neither case controlled on the specific issue before the Court.  By asking the Court to find that bankruptcy judges cannot enter final orders in a subset of fraudulent conveyance actions – i.e. those against non-claimants who have not filed claims against the bankruptcy estate – the Movants were essentially asking the Court to declare a portion of 28 U.S.C. § 157 unconstitutional.  The Court refused to do so, noting the “general principle of judicial restraint” and presumption of constitutionality for federal statutes.  Op. at 16.  Ultimately, the Court held that “[b]ankruptcy courts, having been granted the authority to do so by Congress, may enter final judgments in all core fraudulent transfer claims.”  Op. at 6.